Reserve Bank of Australia Annual Report
2013

Contents

The Reserve Bank of Australia is established by statute as Australia's central
bank. The Bank's responsibilities include formulating and implementing
monetary policy, promoting financial stability, issuing banknotes, providing
banking services to government, operating the high-value payments system,
managing Australia's foreign reserves and setting payments system policy.
The Reserve Bank Act states that it is the Bank's duty to contribute
to the maintenance of price stability, full employment, and the economic
prosperity and welfare of the Australian people. Since 1993, this general
mandate has found concrete expression in the form of a medium-term inflation
target of 2–3 per cent, on average, over the business cycle.

The activities undertaken by the Reserve Bank are overseen by the Reserve Bank Board,
Payments System Board and several permanent committees. The Reserve Bank
Board has responsibility for monetary policy and banking policy, as well
as a range of other policy responsibilities and statutory obligations, while
the Payments System Board determines the Bank's payments system policy.
The Bank's permanent committees include the Reserve Bank Board Audit
Committee and Remuneration Committee, the Executive Committee and the Risk
Management Committee. A key governance initiative during the year under review
was the development and launch of a new Code of Conduct articulating the
Bank's core values.

The Board comprises nine members: the Governor (Chairman), Deputy Governor (Deputy
Chairman), Secretary to the Treasury and six other non-executive members
appointed by the Treasurer. Jillian Broadbent AO completed her third term
on the Board in May 2013.

The Reserve Bank seeks to ensure a high degree of transparency about its goals, decision-making
processes and the basis of its policy decisions. In addition to regular announcements
about monetary policy decisions of the Reserve Bank Board, the Bank has an
active program of communication. It informs financial markets, media and
the public about its views on monetary policy through the quarterly Statement on Monetary Policy
and its assessment of Australia's financial system through its bi-annual
Financial Stability Review. It disseminates research conducted by
its staff in the form of Research Discussion Papers and in articles in the
quarterly Bulletin. The Governor and other senior staff gave 42
on-the-record speeches and attended a number of parliamentary hearings during
the year under review.

The Reserve Bank undertakes transactions in domestic and international financial
markets in order to implement the Board's monetary policy decisions,
manage the nation's foreign reserve assets and provide banking services
(mainly to the Australian Government). The structure of the Bank's balance
sheet, which grew by around $18 billion over 2012/13, is influenced by these
transactions as well as the Bank's role in issuing the nation's banknotes.
To meet the Board's cash rate target, the Bank operates in financial
markets to maintain an appropriate level of exchange settlement balances
(which are used by financial institutions to settle their payment obligations
with each other and the Bank). The Bank is also an active participant in
the foreign exchange market (mainly on behalf of the Australian Government)
and manages Australia's official reserve assets.

The Reserve Bank provides a range of banking, registry and payment settlement services
to participants in the Australian financial system, the Australian Government,
and other central banks and international bodies. These include services
associated with the operation of the Australian Government's principal
public accounts; transactional banking services to government agencies; custodial,
registry and related services; and the operation of the real-time gross settlement
system for high-value Australian dollar payments. The Bank works closely
with its agency customers and the Government more generally to ensure that
they have access to services that are consistent with their needs and those
of the public. The Bank has also commenced a major program of work to upgrade
its banking systems and continues to invest in its settlement infrastructure.

The Reserve Bank is responsible for ensuring that there are sufficient high-quality
banknotes in circulation to meet the public's demand. The Bank ensures
that enough banknotes are printed to meet public demand, maintains the quality
of banknotes in circulation by withdrawing worn banknotes and replacing them
with new banknotes and conducts research to ensure that Australian banknotes
remain secure against counterfeiting. At the end of June 2013 there were
1.2 billion banknotes worth $56.9 billion in circulation. With only around
10 counterfeits detected per million genuine banknotes in circulation, the
level of banknote counterfeiting is low relative to international experiences
and is similar to levels experienced in Australia in recent years. In September
2012, the Bank announced plans to upgrade the security of Australia's
banknotes as part of the Next Generation Banknote (NGB) program. The upgraded
banknotes will retain many of the key design elements of the current banknote
series and will incorporate a number of new features designed to make Australia's
banknotes secure in the future.

The Reserve Bank actively participates in work addressing the challenges facing the
global economy and improving the global financial architecture. It does so
through its membership of global and regional forums, including the G20,
the Financial Stability Board, the Bank for International Settlements, the
Basel Committee on Banking Supervision, the Committee on Payment and Settlement
Systems, the International Monetary Fund, the Executives' Meeting of
East Asia-Pacific Central Banks, the Organisation for Economic Co-operation
and Development, the Government Partnership Fund and South Pacific Central
Bank Cooperation. The Bank also maintains close bilateral relationships with
other central banks.

In addition to its Head Office in Sydney, the Reserve Bank has offices in Adelaide,
Brisbane, Melbourne and Perth. These offices play an important role in the
Bank's business liaison program and form a key component of the Bank's
communication with members of the public, business, government, community
organisations and academia in their respective states. The staff involved
in the liaison program conducted around 1,000 interviews around the country
over the past year. The Bank continues to convene its Small Business Advisory
Panel to discuss issues relating to the provision of finance and the broader
economic environment for small businesses. The Museum of Australian Currency
Notes houses a permanent collection of artefacts and also hosts periodic
exhibitions and talks. The Museum welcomed 13,500 visitors in the past year.
The Bank continued to sponsor Australian and international economic research
in areas that are closely aligned with its primary responsibilities, and
contributed to various charitable initiatives.

A high proportion of the Reserve Bank's call on resources comes from activities
associated with its key policy and operational responsibilities in financial
markets, settlements and banking. A range of projects – including the
upgrade of banking systems and the development of new banknotes – is
underway, while other projects in markets and payments settlements are planned
for the year ahead. These initiatives have begun to add significantly to
the Bank's operating costs and will continue to do so for several years.
This work is justified, in the Bank's view, by the public interest and
will help the Bank to continue to meet its responsibilities in a changing
financial landscape. The Bank has 1,115 employees and maintains offices across
Australia and in key locations overseas (Beijing, London and New York). The
Bank is committed to improving the environmental performance of its operations
and will continue to set targets and pursue lower energy and water consumption.

The Reserve Bank is exposed to a broad range of risks in carrying out its responsibilities.
The most significant risks are those associated with the financial assets
held by the Bank to support its operations in financial markets. However,
the Bank also manages material risks arising from its banking and settlement
operations, the implementation of large and complex projects and from the
administration of the Bank itself. The Bank seeks to manage its risk profile
carefully, with the Risk Management Committee providing oversight of the
risk management process.

The Reserve Bank manages a balance sheet of financial assets to conduct operations
in financial markets to pursue its monetary policy objectives. The balance
sheet fluctuates in size according to these operations; total assets averaged
around $89 billion in 2012/13. These assets include Australia's foreign
exchange reserves as well as domestic securities used to manage liquidity.
Liabilities on the balance sheet are composed of banknotes on issue, deposits
of the Australian Government and other customers, and capital and reserves.
The Bank recorded an accounting profit of $4,313 million in 2012/13. As agreed
with the Treasurer, the Bank's distributable earnings of $588 million
in 2012/13 will be devoted entirely to rebuilding the Reserve Bank Reserve
Fund (RBRF), the Bank's main permanent capital reserve, which had been
depleted by large accounting losses in previous years.

The Reserve Bank is required to report to the Australian Parliament each year on
its equity and diversity program. The major focus of work in this area last
year was to enhance the Bank's culture of inclusiveness and better understand
the equity and diversity issues associated with employee participation and
work-life balance. The Bank is also required to report each year on matters
of work health and safety, workers' compensation and rehabilitation as
they affect the Bank. The Bank has a strong track record in all aspects of
work health and safety, and compliance with the relevant legislation and
the Bank's Conditions of Licence was confirmed by external audits of
the Bank's safety, compensation and rehabilitation arrangements. In addition,
the Bank is an Australian Government agency subject to the Freedom of Information Act 1982.
It received 17 requests for access to documents under the FOI Act in the
year under review.